Uncertain Future

The $100-billion Indian IT sector is at crossroads. On the one hand, its growth rate for the fiscal 2013 is under severe pressure due to volatility in developed economies like the US and Europe. On the other, increasing questions are being asked on the revenue model of Indian IT companies and their relevance in the post Lehman era.

Indian companies who have grown during the times when cost reduction was the main mantra are slowly waking up to innovation, acquisition led growth and outcomes based business, in order to compete against their peers as well as multinational companies. Some conservative companies were forced to consider alternative strategies – like acquisitions and exploring newer revenue models to pursue growth.

Infosys, Cognizant, Wipro and Tech Mahindra all made acquisitions in 2012, with an eye on growth in 2013 and beyond. “I believe it’s time to drop the word conservative where Infosys is mentioned,” says Infosys CEO, SD Shibulal. Along with that, Infosys is sticking to its strategy of products, platforms and services, which would contribute to 30 per cent of its revenues going ahead, which would help the company maintain its high margin.

According to T K Kurien, CEO, IT services, Wipro Ltd, the offshoring business is getting commoditised and “we have to provide upfront differentiation of our services offerings in order to bag deals,” a fact which the bulk of the Indian IT sector agrees. According to Swami Krishnan, VP and Head, Marketing, Sasken, the challenge before IT firms would be to move from cost to value. “Companies that are closer to offering product development services for their clients will see an up tick in business,” he says.

To move up the value chain, companies like Cognizant, Wipro and Tech Mahindra have made acquisitions with an eye to get more consulting revenues, domain expertise and higher skilled manpower. Others are trying to achieve the same results in an organic manner. HCL Tech, which acquired Axon, an SAP consulting company in 2008 is going after deals that have the above mentioned expertise as a part of its strategy. “We have worked with number of companies on business outcomes based on our outsourcing work and this is an area that we will continue to build on,” says Shami Khorana, President, HCL America. However, he added that the company will look at a combination of regular outsourcing and outcomes-based outsourcing, in the future.

Reboot 2013

Some of the reasons, as to why companies are doing all this more aggressively, according to analysts, is due to the fact that companies who outsourced business functions are looking at something beyond cost reduction. “Outsourcing is undergoing a lot of changes and the focus should be on giving value to the client instead of merely lowering costs,” says Sanjoy Sen, Senior Director, Deloitte, India.

This is reflected in very low outsourcing spending in 2011 and 1012. According to Gartner, worldwide spending for IT outsourcing services will reach $251.7 billion in 2012, a mere 2.1 percent increase from 2011 spending of $246.6 billion. Global spending for IT outsourcing services was $315.8 billion in 2011, a growth of 7.7 per cent over 2010, indicating considerable slowdown in the outsourcing segment. Post the 2008 slowdown, flow of outsourcing work has reduced and the top four IT companies, on an average bagged about 40 clients in excess of $500 million in FY 12. Compared to that in 2007, the top four bagged about 100 deals in excess of $500 million.

IT executives are awaiting evidence that the tenuous economic recovery will progress before engaging in more strategic outsourcing initiatives, according to V Balakrishnan, Member of the Board and who heads the Infosys BPO, Finacle and India. However, on the ground, some companies are upbeat about 2013. Recently, when talking to reporters, TCS MD CEO, N Chandrasekaran said, “We feel that FY14 is going to be a better year.” While the company does not give out guidance (along with most other companies), TCS is confident of the fact that post the US presidential elections, there would be more focus on job and economic growth, which would drive outsourcing spends for IT companies.

While the outsourcing spends have been low as compared to previous years, companies are eying newer ways of dealing with these changing outsourcing dynamics. Balakrishnan explains, “Today there are two kinds of spending. One is efficiency in areas like Application Development and Maintenance (ADM), which contributes about 30 per cent of revenues to the sector. Secondly, innovation spending is happening.”

“If you can have a strong case on efficiency and innovation spending, you have a good combination,” sums up Peter Schumacher, CEO, Value Leadership Group.

Concerns remain

Despite the bullish attitude, analysts are still not convinced about the prospects of the sector going ahead. Analysts who BL spoke to felt that growth will be similar to that of FY 13. According to Nasscom, the Indian IT sector will grow in the range of 8-11 per cent in the FY 13 fiscal.

“Temporary suspension of work happening at key BFSI accounts which are the highest contributor to Indian IT revenues, reduced discretionary spending and value that Indian IT companies can bring to the table are concern areas going ahead,” says Ankita Somani, IT Analyst, Angel Broking. Others point out that deal flows will continue to be challenged in 2013. “US and Europe are not out of the woods and this will continue to impact revenue growth and margins for IT companies,” says A K Prabhakar, Senior Vice President - Equity Research. Infosys which had 31.7 per cent EBITDA margins in FY12 will see it going down to 27.9 per cent in FY14, according to a research by Elara Capital.

Shibulal is often quoted as saying that companies are living in a ‘new normal’. This means sluggish economic growth in the west, tighter outsourcing spends, more bang for the outsourcing buck, maintaining margins are some of the things that companies will have to live in this ‘new normal’ in 2013 like in 2012.

>venkatesh.ganesh@thehindu.co.in

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